By H.L. Sekhri
Chartered Accountant
Chartered
Accountants who are in practice are not supposed to carry on any business
activity other than accounting professional activity. Reference must be made in
this regard to Part-I of the First Schedule of the Chartered Accountants Act,
1949 which deals with professional misconduct by CAs in practice; clause (11)
of the Act reads as follows:
The Chartered
Accountants Act, 1949
‘THE FIRST
SCHEDULE
[See Sections
21(3), 21A(3) and 22]
PART-I:
Professional misconduct in relation to chartered accountants in practice.
A Chartered
Accountant in practice shall be deemed to be guilty of professional misconduct,
if he –
(1) to (10)
……………
(11) engages in
any business or occupation other than the profession of chartered accountants
unless permitted by the Council so to engage;
Provided that nothing contained herein shall disentitle a chartered
accountant from being a director of a company (not being a managing director or
a whole time director) unless he or any of his partners is interested in such
company as an auditor.’
Given this
background, an attempt will be made here to understand ‘Whether chartered
accountants in practice can have dealings in Derivatives listed on stock
exchanges.’
Let us first look
at section 43(5) of the Income Tax Act; sub-clauses (d) and (e) of the same
read as under:
‘Sec. 43(5) –
(a) to (c)
……………..
(d) an eligible transaction in respect of trading
in derivatives referred to in clause [(ac)] of section 2 of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock
exchange; or
(e) an eligible transaction in respect of trading
in commodity derivatives carried out in a [recognized stock exchange] which is
chargeable to commodities transaction tax under Chapter VII of the Finance Act,
2013 (17 of 2013),
shall not be
deemed to be a speculative transaction.’
WHAT ARE
DERIVATIVES?
The term
‘Derivative’ indicates that it has no independent value, i.e., its value is
entirely ‘derived’ from the value of the underlying asset. The underlying asset
can be securities, commodities, bullion, currency, livestock or anything else.
In other words, Derivative means a forward, future, option or any other hybrid
contract of pre-determined fixed duration, linked for the purpose of contract
fulfilment to the value of a specified real or financial asset or to an index
of securities.
The definition of
Derivatives is specified u/s 2(ac) of the Securities Contracts
(Regulation) Act, 1956 and reads as under:
‘(ac)
“Derivative” includes –
(A) a security derived from a debt instrument,
share, loan, whether secured or unsecured, risk instrument or contract for
difference or any other form of security;
(B) a contract which derives its value from
the prices, or index of prices, of underlying securities.’
Whether
income / loss on dealings in Derivatives results in Income from Business
Since the issue of
Derivatives is laid down in section 43(5) of the Income Tax Act which falls
within the provisions of sections 28 to 44 which deal with ‘Income from
Business or Profession’, it seems implied that income / loss from dealing in
Derivatives shall form part of the ‘Income from Business’ and not any Other
Head of Income such as Income from Other Sources.
Reference is made to the ‘Guidance Note’ of the Institute of Chartered
Accountants of India on Tax Audit u/s 44AB of the Income Tax Act (Revised 2014
Edition), which contains a chapter dealing with determining the turnover or
gross receipt in respect of transactions in Derivatives / Future & Option. The
relevant paragraph 5.14 clause (b) of the said ‘Guidance Note’ u/s 44AB reads
as under:
‘5.14 –
(a)………….
(b) Derivatives,
futures and options: Such transactions are completed without the delivery of
shares or securities. These are also squared up by payment of differences. The
contract notes are issued for the full value of the asset purchased or sold but
entries in the books of accounts are made only for the differences. The
transactions may be squared up any time on or before the striking date. The
buyer of the option pays the premia. The turnover in such types of transactions
is to be determined as follows:
(i) The total of
favourable and unfavourable differences shall be taken as turnover.
(ii) Premium
received on sale of options is also to be included in turnover.
(iii) In respect
of any reverse trades entered, the difference thereon should also form part of
the turnover.’
This also added to
the understanding that income / loss from transactions of Derivatives, Futures
and Options shall likely be treated as Income from Business since the same is
considered in the ‘Guidance Note’ for the purpose of section 44AB which relates
to Income from Business or Profession only and not any other heads of income
under the Act.
In view of the
above, the following points emerge for consideration:
1. Whether the income from the activity of a
chartered accountant in practice in respect of his investment dealing in
Derivatives listed on the stock exchange shall be treated as Income from
Business, in case there are multiple transactions of Derivatives undertaken by
a chartered accountant in a year.
2. Whether a chartered accountant in practice can
otherwise invest in Derivatives listed on the stock exchange as part of his
investment activity.
3. Although such income / loss on account of
dealings in Derivatives may be treated as Income from Business for the purpose
of Income Tax, but whether such income / loss can escape being treated as
Income from Business or Profession as per the guidelines of the Institute on
the subject, if any.
4. Whether a chartered accountant in practice is
under obligation to seek permission of the Council of the Institute before
dealing in Derivatives.
To attain clarity
on the issue, the necessary clarification was sought from the Institute of
Chartered Accountants of India and the Secretary, Ethical Standards Board of
the Institute of Chartered Accountants of India, clarified the position as
under:
‘In this regard,
please note that the Ethical Standards Board at its 148th Meeting
held on 13.06.2019 was of the view that “Derivative transaction on stock exchange is not any kind of
investment but it’s more likely a business prohibited under Clause (11) of Part
1 of the First Schedule to the Chartered Accountants Act, 1949. Such kind of
practice is not permissible to members in practice.”’
In view of this, it
is submitted that the above clarification may be kept in mind by the chartered
accountants in practice in case they undertake transactions in Derivatives and
they should do so with the prior permission of the Council of the Institute so
as to protect them from any possible (charge of) professional misconduct under
the Chartered Accountants Act, 1949.
Practising chartered accountant as ‘Karta’ of Hindu Undivided Family
In case a chartered
accountant in practice undertakes dealings in Derivatives as the karta
of his HUF, such activity shall also not be permissible in view of the above
guidelines of the Ethical Board of the
Institute.
In this regard
reference may be made to Part-1 of the First Schedule – Clause 11 of the Code
of Ethics, Volume-III (Case Law Referencer) published by the Institute
which reads as under:
Practising CA as karta of Hindu Undivided Family
1.1.11(191) – A
member as a karta of his Hindu Undivided Family entered into a
partnership business for a short period with non-chartered accountants for
engaging in business other than the profession of chartered accountants without
prior permission of the Council.
Therefore, he was
found guilty in terms of clauses (4) and (11).
[R.D. Bhatt
vs. K.B. Parikh – Page 191 of Vol. VI (2) of Disciplinary Cases – Decided on 15th,
16th and 17th December, 1988].
1.1.11(192) – Where
a chartered accountant was karta of the HUF and was engaged in the
business of a firm without permission of the Council.
He was held guilty
of professional misconduct.
[V. Krishnamoorthy vs. T.T.
Krishnaswami – Page 192 of Vol. VII (2) of Disciplinary Cases – Council’s decisions
dated 27th to 29th September, 1992].
1.1.11(193) – Where
a chartered accountant acted as karta of a Hindu Undivided Family
without taking prior permission of the Council.
It was held that he
was inter alia guilty of professional misconduct.
[B.L. Asawa,
Chief Manager, Punjab National Bank, Delhi vs. P.K. Garg – Page 728 of Vol. IX
– 2A – 21(4) of Disciplinary Cases – Council’s decisions dated 16th
to 18th September, 2003].
Clause (4) be read with Authority of the Council as contained in
Clause (11)
These guidelines of
the Ethical Board of the Institute are self-explanatory and may be kept in mind
by chartered accountants in practice who carry on dealings in Derivatives as karta
of and on behalf of their HUF.
Applicability to other professionals and Government servants
In case the same
analogy is extended to other professionals, such as doctors in practice or
advocates in practice, these categories of professionals may also need to be
vigilant about it. It may not be out of place to point out that even Government
servants who are not otherwise eligible to carry on any business need to be
cautious about dealings in Derivatives in view of the above clarification by
the Institute.
CONCLUSION
This article has
been written with the intention of bringing this issue to the notice of the
fraternity of chartered accountants so that while undertaking any transactions
/ dealings in Derivatives either in their individual capacity or as the karta of their Hindu Undivided Family, they may not be caught
on the wrong foot vis-à-vis the Ethical Rules of the Institute of
Chartered Accountants of India; they should seek the prior permission of the
Council of the Institute as laid down in Part-1 of the First Schedule of the
Chartered Accountants Act, 1949 before carrying out dealings in Derivatives.
The Idea of Dharma and Adharma
Dharma is both that which we hold to and that which
holds together our inner and outer activities. In its primary sense it means a
fundamental law of our nature which secretly conditions all our activities, and
in this sense each being, type, species, individual, group has its own dharma.
Secondly, there is the divine nature which has to develop and manifest in us,
and in this sense dharma is the law of the inner workings by which that grows
in our being. Thirdly, there is the law by which we govern our outgoing thought
and action and our relations with each other so as to help best both our own
growth and that of the human race towards the divine ideal.…Dharma is all that
helps us to grow into the divine purity, largeness, light, freedom, power,
strength, joy, love, good, unity, beauty, and against it stands its shadow and
denial, all that resists its growth and has not undergone its law, all that has
not yielded up and does not will to yield up its secret of divine values, but
presents a front of perversion and contradiction, of impurity, narrowness,
bondage, darkness, weakness, vileness, discord and suffering and division, and
the hideous and the crude, all that man has to leave behind in his progress.
This is the adharma, not-dharma, which strives with and seeks to overcome the
dharma, to draw backward and downward, the reactionary force which makes for
evil, ignorance and darkness
— Sri
Aurobindo
(Essays on the Gita, CWSA, Vol. 19, p.172)
